Facebook: Deutsche Ups to Buy, $40 Target, on Mobile Upside

By Tiernan Ray

Shares of Facebook (FB) are down 47 cents, or 1.5%, at $31.25 this afternoon despite the stock getting upgraded this morning by Deutsche Bank’s Ross Sandler to Buy from Hold, with a price target of $40, up from $24, based on what Sandler believes are superior prospects for revenue growth among Internet companies.

Sandler writes that ads in users’ news feeds in the mobile version of Facebook are “the game changer” for the company, and that “the ramp-up is happening much faster than our initial estimates.”

News feed ads, as opposed to the traditional purchased ads on the “right rail” of the home page, may generate $2.74 billion in revenue this year, versus the $3.36 billion that will probably come from the right rail ads, Sandler estimates.

Ad revenue may rise by more than 40% this year, he writes, better than the consensus expectation, and there are other “catalysts” for 2013, he believes, including some that may be revealed at tomorrow’s media event taking place at Facebook’s campus.

Sandler offers his rundown of the growth drivers:

The $200m in newsfeed revenue in 3Q12 could be over $800m per quarter exiting 2013 as the company ports mobile ads to international regions, further increases the sell-through, and introduces the upcoming video ad unit in 2Q. There are few companies that can launch newfeatures or ads and within six months generate a $2B annualized revenue run rate; Video ads could be the next big step-up. We see several catalysts in 2013, including better monetization of right rail from FBX and Custom Audiences, Gifts, the off-FB ad network and internal DSP, the “social layer software” for phones, and others. These initiatives should help boost consensusmeaningfully even with a decline in right rail, and should drive the above-avg multiple even higher.

As for tomorrow’s event, he thinks it won’t bring general Web search capabilities, but rather something more of a tweak to the current site:

There has been market and media speculation that FB could unveil a new search technology that helps users navigate the site much faster on PC and mobile, using the social taxonomyaround user and business profile information. We don’t think FB is trying to index the broader web (yet), but is trying to make navigation on-site much more seamless. Our upgrade is not based on search, but it should certainly help the multiple (and potentially weigh on Google‘s (GOOG).

Shares of Google were under pressure today, falling $16.74, or 2.3%, to $723.25.

Update: Piper Jaffray’s Gene Munster, who has Overweight ratings on both Facebook and Google, thinks there will be nothing earth-shattering tomorrow:

We note that there has been significant speculation as to what Facebook’s Tuesday media event may unveil. We believe the biggest point of speculation is around a Facebook phone. We believe it is unlikely that Facebook unveils a phone at the event based on our work on the iPhone channel. We believe it is more likely that Facebook introduces some modest new product updates for users and/or advertisers which may include updates to the Timeline. If there is any pullback in shares of FB following the event, we would be buyers of the stock.

Also this afternoon, TechCrunch‘s Josh Constantinewrites that he’s seen a pre-release version of a revamp of Facebook’s app for Apple‘s (AAPL) iOS operating system for the iPhone, “which ditches the empty blue and white chrome for full-screen photo tiles and overlaid text.”

Adds Constantine, “Reminiscent of Flipboard, Google+ for iPad, and Microsoft Metro, the fresh design could make Facebook’s feed exciting again.” Constantine is not sure if the changes to mobile will be unveiled at tomorrow’s event.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.